NEW YORK, July 27 ― Wall Street equities fell and US Treasuries rallied day a day before a likely Federal Reserve rate hike as investors grappled with growing economic concerns after retail giant Walmart Inc's profit warning and signs of a looming gas supply crisis in Europe.
The bid for safety also boosted the US dollar, which snapped a three-session losing streak, while the energy supply concerns weighed on the euro.
European Union leaders agreed to ration gas usage after Russian's Gazprom said gas flows to Germany would fall from today to half of the current amount ― already at just 40 per cent of normal capacity.
US equities fell with retail stocks after Walmart slashed its profit forecast late on Monday as surging prices for food and fuel spurred consumers to cut back on discretionary purchases.
Since Walmart is seen as a “litmus test for the health of the consumer,” Carol Schleif, deputy chief investment officer at BMO Family Office, said investors are concerned about growth and feeling uncertain ahead of key economic data due out this week and the Fed's interest rate decision expected today.
“This week is forcing investors to be very short-term oriented. It's not allowing anybody to lift their eyes up even a week or a month,” Schleif said. “It's an asset market, not just in stocks, that seems to suggest people think growth is questionable in the intermediate term.”
Investors are expecting a 75 basis point Fed rate increase on Wednesday, with markets pricing about a 10 per cent risk of a larger hike, as well as waiting to see whether economic warning signs prompt a shift in rhetoric.
“If they did 100 basis points it would probably surprise the market. There's that nervousness. If it's 75, as expected, and the Fed says it's starting to see hints of slowing, the market might take that as a positive,” Schleif said.
The Dow Jones Industrial Average fell 228.5 points, or 0.71 per cent, to 31,761.54, the S&P 500 lost 45.79 points, or 1.15 per cent, to 3,921.05 and the Nasdaq Composite dropped 220.09 points, or 1.87 per cent, to 11,562.58.
The pan-European STOXX 600 index closed down 0.03 per cent and MSCI's gauge of stocks across the globe shed 0.92 per cent.
Adding to yesterday's gloom was the International Monetary Fund forecast for global real GDP growth of 3.2 per cent in 2022, down from its 3.6 per cent forecast issued in April, with downside risks from high inflation and Russia's invasion of Ukraine potentially pushing the world economy to the brink of recession.
The gap between yields on two- and 10-year Treasury notes widened yesterday after more than two weeks when the short-end yield has been higher than the long end ― often a recession signal.
Benchmark 10-year notes last rose 5/32 in price to yield 2.8032 per cent, from 2.82 per cent late on Monday. The 30-year bond last rose 17/32 in price to yield 3.0227 per cent, from 3.05 per cent. The 2-year note last fell 2/32 in price to yield 3.0609 per cent, from 3.035 per cent.
“The flight to quality makes sense if you're concerned about a meaningful slowdown in growth or even heightened recession fears in Europe because of volatility in energy supply,” said Subadra Rajappa, head of US rates strategy at Societe Generale. “Then you should see investors flock to Treasuries.”
The dollar index rose 0.752 per cent, with the euro down 1.04 per cent to US$1.0114. The Japanese yen weakened 0.15 per cent versus the greenback at 136.90 per dollar, while Sterling was last trading at US$1.2027, down 0.12 per cent on the day.
After rising earlier in the session, oil prices settled in the red as investors worried about weaker consumer confidence and the expectation that another 20 million barrels of crude oil would be released from the US Strategic Petroleum Reserve.
Prices were supported earlier in the session on news that Russia was tightening its gas squeeze on Europe.
US crude settled down 1.78 per cent at US$94.98 (RM423.44) per barrel and Brent settled at US$104.40, down 0.71 per cent.
Spot gold dropped 0.1 per cent to US$1,716.98 an ounce as investors eyed economic uncertainties and waited on the Fed. Bitcoin last fell 1.86 per cent to US$20,910.08. ― Reuters
